The U.S. states’ tireless attempts at diminishing protections afforded under Public Law 86-272 (“P.L. 86-272”) have been headlining the state tax press for the last several years. For example, we saw, among other developments: (1) the MTC publish its revised Statement of Information (“MTC Statement of Information”) outlining proposed protected and unprotected activities under P.L. 86-272, including certain activities conducted over the Internet; (2) states (including California, New Jersey and New York) publish guidance seeking to adopt the MTC Statement of Information, and (3) a California Superior Court invalidate the Franchise Tax Board’s attempted adoption of the MTC Statement of Information through guidance (TAM No. 2022-01) in American Catalog Mailers Association v. California FTB, No. CGC-22-601363 (Dec. 13, 2023) because the guidance was a “regulation” that did not comport with the requisite procedural requirements.
Most recently, the New York Supreme Court (which is New York’s trial-level court) in American Catalog Mailers Association (“ACMA”) v. Department of Taxation and Finance, No. 903320-24 (N.Y. Sup. Ct., Apr. 28, 2025), addressed the validity of New York’s regulations addressing Internet activities that purportedly violate the protections afforded by P.L. 86-272. In its April 28, 2025 decision, the Supreme Court for the County of Albany addressed (on a motion for summary judgement in a declaratory action) whether the “Internet activities” regulation, 20 NYCRR 1-2.10 (“NY Internet Activities Regulation”), adopted by the New York Department of Taxation and Finance (“Department”) conflicted with P.L. 86-272 and was thus, invalid. ACMA also challenged the Department’s retroactive application of the NY Internet Activities Regulation.
The Department drafted and adopted the NY Internet Activities Regulation (along with a slew of other regulations) in the aftermath of New York State’s corporate tax reform (effective January 1, 2015). The final regulations (including the NY Internet Activities Regulation) were published in December 2023, but the Department announced that they applied retroactively beginning January 1, 2015 (the effective date of the underlying tax reform legislation).
At issue were portions of the regulation that ACMA argued impermissibly expanded the categories of unprotected activities to include certain “activities engaged in via the Internet.” The expansiveness of the unprotected activities was highlighted in the examples found within the regulation, which included a number of internet activities. The examples provided in the NY Internet Activities Regulation closely track many of the examples found in the MTC Statement of Information mentioned above:
Example 6: A foreign corporation solicits sales of tangible personal property on its website and provides assistance to customers by posting a list of static frequently asked questions (“FAQs”) and answers on the corporation’s website. Since this activity is de minimis under this section, the corporation is exempt from tax under article 9-A.
Example 7: A foreign corporation regularly provides assistance to its customers after its products have been delivered, either by email or electronic “chat” that customers initiate by clicking on an icon on the corporation’s website. For example, the corporation regularly advises customers on how to use products after the products have been delivered. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section.
Example 8: A foreign corporation solicits and receives online applications for its branded credit card via the corporation’s website. The issued cards will generate interest income and fees for the corporation. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section.
Example 10: A foreign corporation places Internet “cookies” onto the computers or other electronic devices of is [sic] customers. These cookies gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section.
Compare NY Internet Activities Regulation (Examples 6, 7, 8 & 10, quoted above), with the MTC Statement of Information Examples (Aug. 4, 2021) at pp. 8-10.
ACMA argued that the NY Internet Activities Regulation plainly violated P.L. 86-272 because the NY Internet Activities Regulation aims to extend the New York corporate income tax to businesses solely engaged in out-of-state activities (contrary to P.L. 86-272). Additionally, ACMA argued that the retroactive application of the regulations (including the NY Internet Activities Regulation) back to 2015 violated businesses’ due process rights. The Department, in turn, argued that (1) the U.S. Supreme Court’s ruling in South Dakota v. Wayfair meant a taxpayer may lose P.L. 86-272 protection when its Internet activities go beyond solicitation (and the NY Internet Activities Regulation was meant to reflect this ruling and define activities that were de minimis or ancillary to solicitation or that go beyond solicitation), and (2) the retroactive application of the NY Internet Activities Regulation does not violate due process. The Court sided with the Department as to the substantive validity of the NY Internet Activities Regulation, stating “PL 86-272 does not preempt the State’s adoption of the Internet Activities Rule, which was amended in response to [Wayfair]”, and “the Internet Activities Rule does not impermissibly expand on the exemptions provided for in PL 86-272.” The Court noted that “PL 86-272 does not prohibit the State from identifying and regulating which internet activities are construed to constitute more than solicitation of orders for taxation purposes, in this evolving virtual world, the challenged regulations do not conflict with the tax exemptions set forth in the Federal law.”
An understanding of the interplay between nexus, Wayfair, and P.L. 86-272 is important in order to digest the conclusion in ACMA. When P.L. 86-272 was first articulated in the 1950s, “nexus” meant physical presence nexus, and P.L. 86-272 established an exception to a business otherwise having physical presence (i.e., a business could have physical presence but still be protected from net income taxation under P.L. 86-272). Wayfair held that economic activities (e.g., remote sales into a state above a certain threshold) can also create nexus, separate from physical presence. If a business has economic nexus with a state, it does not necessarily follow that the business has exceeded P.L. 86-272. Following that logic, if the activities of a business are not nexus-creating in the first instance, those same activities cannot violate P.L. 86-272 since P.L. 86-272 is meant to protect activities that would otherwise trigger nexus. Thus, the Department’s position and the Court’s conclusions with respect to the interplay between Wayfair and P.L. 86-272 is logically flawed and likely to be subject to future scrutiny.
However, in an interesting turn of events, the Court held that the NY Internet Activities Regulation could not be applied retroactively. First, the Court noted that in the context of assessing whether a retroactive provision violates the Due Process Clause, the applicable standard was whether the retroactive application “is so harsh and oppressive as to transgress the constitutional limitation.” In New York, the “harsh and oppressive” standard is analyzed using a three-part factor test that weighs: (1) the taxpayer’s forewarning of a change in the legislation and the reasonableness of reliance on the old law, (2) the length of the retroactive period, and (3) the public purpose for retroactive application. The Court noted that the “focus of the three-pronged test is fairness.” The Department did not need to prevail on all three factors to establish that retroactivity was rational.
The Court noted that the first instance where the Department forewarned of retroactive application of its tax reform regulations (including the NY Internet Activities Regulation) was in the final December 2023 publication (not in any of the draft versions), many years after the purported retroactive application date of 2015. The Court also noted that “the length of the retroactive period – nearly nine years – is excessive[.]” Finally, the Court also noted that draft versions of the regulations (e.g., the April 2022 draft) contained a disclaimer that stated: “[T]hese draft regulations are not yet final and should not be relied upon,” which cut in favor of ACMA. The Court thus concluded that the factors weighed against retroactive application of the NY Internet Activities Regulation because ACMA’s due process rights were violated in its retroactive application.
ACMA follows another recent decision made by the Albany New York Supreme Court, Paychex, Inc. (“Paychex”) v. Department of Taxation and Finance, No. 904047-24 (N.Y. Sup. Ct., Dec. 18., 2024), where the retroactive application of a Department regulation (also finalized in December 2023) that aimed to exclude Professional Employer Organization (“PEO”) reimbursements from the sales factor (“NY PEO Regulation”) was upheld. Like the NY Internet Activities Regulation, the NY PEO Regulation was made retroactive to January 1, 2015. In Paychex the Court admitted that the nine-year retroactive period was long. However, “[a]lthough nine years appears to be a significant period, under these circumstances, it is possible that it is a reasonable period of time.” The crucial difference between Paychex and ACMA came down to the forewarning factor, with the Court finding a number of facts tilting the scales in favor of the Department in the Paychex case: (1) the NY PEO Regulation was first published in draft form in September 2016, whereas in ACMA the NY Internet Activities Regulation was first published in April 2022; and (2) Paychex had significant interactions with the Department (correspondence, meetings, etc.) from 2017-2022, where they voiced their concerns about the NY PEO Regulation. Interestingly, the Court in Paychex did not appear to consider the Department’s disclaimer that “these draft regulations are not yet final and should not be relied upon” (found on each iteration of the draft regulations), something that was specifically cited by the Court in ACMA. In Paychex, the Court concluded that “[t]he forewarning factor tips in favor of the [Department] as Petitioner was aware of the change as early as 2017.”
Finally, while the ACMA decision seemingly upholds (for now) prospective application of the NY Internet Activities Regulation, it is important to note that at the federal level, the House Judiciary Committee advanced legislation that would expand the protections afforded by P.L. 86-272. Effectively, the legislation seeks to bolster the protections afforded under P.L. 86-272 and amends the definition of “solicitation of orders” to mean “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” The legislation passed with a vote of 23-17 and is moving forward to be considered as part of the final reconciliation bill. The legislation’s impact may extend beyond Internet activities and seemingly overturns the judicial precedent set by the U.S. Supreme Court in Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992) which articulated that protected solicitation activities are activities that are “entirely ancillary to requests for purchases-those that serve no independent business function apart from their connection to the soliciting of orders.” (emphasis same). This highlights the rapidly changing landscape in the realm of Internet-related taxation and how it interacts with laws that predate the digital era.
Contact the Authors: Maria Eberle, Lindsay LaCava and David Simon-Fajardo
